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Credit Cards & Home Improvement

Most of the large home improvement retailers such as Home Depot, Lowes and Rona (Figure 1) offer a store credit card. These credit cards are not financed by the retailer. They are financed by one of the major credit card companies.

home improvement credit cards
Figure 1 - Home improvement credit cards

Over the last 10 years or so one of the methods that the credit card companies have leveraged to the advantage of the retail industry and themselves is the private labeled credit card. These credit cards offer special incentives, but at a cost to the consumer – very high interest rates.

One of the most common incentives in the private labeled credit card business is to offer a buy now with no payments and no interest for an extended period, usually six, twelve or eighteen months.

The home improvement industry retailers have taken advantage of these offerings in order to entice customers to make purchases at their stores.

It is simple, you do not have the cash available today, but you would like to have new flooring, carpets, remodel your kitchen or bathroom. The retailer is telling you that you can have an extended period of time with no payments or interest accumulating on the unpaid balance – providing you pay the entire amount within the specified no payment, interest free period.

You are confident that this won’t be a problem, so you invest in the home improvements now, rather than saving up for them. After all there is no cost to you the consumer.

The credit card companies are in business to make money. They are not charitable organizations. They are counting on you not paying the total debt that you incurred for the home improvement before the no payment, free interest time period runs out. They know that because no payment is required that the odds are in their favor that you will not make a payment and spend your money somewhere else.

And if you, the consumer, do not pay off the debt completely within the specified time frame, you may think that the worst that will happen is that you will have to start paying interest and minimum payments on whatever is outstanding. Well, you are 50% correct. You will have to start making the minimum payments. However, in most cases, you will be charged back interest on the total amount of the purchase from the date the purchase was made.

As an example, you made a $10,000 purchase on March 1st, the terms of the credit agreement stated that you did not have to make any payments and that no interest would accrue for a period of 12 months.

At the end of February of the following year, you had not made any payments against the $10,000 and if you checked your balance owing on that date it would show that you owed the credit card company $10,000. If you then check your balance on March 1st, your credit statement would look somewhat different. As it would show an interest cost to you from the date of purchase. If we use an annualized interest rate of 20%, and many retail credit cards charge substantially more than that, you would see an interest charge of $2,000 on your statement as of March 1st, one year later. This means that you no longer owe $10,000 you owe $12,000.

Some retailers make as much if not more money from the interest that they get from credit cards than they do from their retail operations.

Employees are trained to offer you credit, to help make your purchase easier and in many cases your first purchase on your new retail credit card will receive a credit of five or ten percent.

Credit can be a great thing. It allows us to do the home improvements that we want today. Just remember to read the fine print before you make the purchase, not after the interest has accumulated.